Tax Abatements Run Amok in the DC Council

If you sat through the June 24th hearing of the DC Council Finance Committee, you might have thought the city was flush with money. The committee heard testimony on more than a dozen bills to give tax breaks to a variety of projects, from affordable housing developments, to a new diner, to 20-year tax breaks for businesses that locate near the Anacostia Metro Station.

DCFPI testified at the hearings and raised a number of concerns, though in most cases, the concerns were not about the projects themselves, many of which seem worthy. Instead, we were troubled that these tax bills represent the continuation of an uncoordinated, ad hoc approach to economic development and affordable housing in DC.

The hearing also highlighted the importance of passing a bill that was introduced last year to require an analysis of the costs and benefits of every proposed tax break for economic development.

While most of these bills are unlikely to be adopted and implemented any time soon — because in fact, the city has no money to spare — the issues are worth exploring. Here’s what DCFPI said.

Tax Breaks for Emerging Businesses: One of the bills would give a 3-year property tax exemption to the Capital City Diner, a new restaurant on Bladensburg Road, NE, in an area that has struggled economically. The diner may indeed need help, but DCFPI’s testimony pointed out that there is no rationale for giving help to this business but not others that also may be struggling to get started. DCFPI urged the Council to adopt the Exemptions and Abatements Information Requirements Act, which would require a financial analysis of proposed tax breaks and help ensure that the businesses most in need of help get it. We also recommended that the city create a fund to help small or emerging businesses, allowing assistance to be provided in a more systematic and transparent way.

Tax Breaks to Encourage Development in Ward 8: The DC Fiscal Policy Institute testified in opposition to a bill that would offer 20-year property tax and business income tax reductions to any business that locates in a district surrounding the Anacostia Metro station. Reviews of similar efforts, like Enterprise Zones, finds that these kinds of incentives don’t tend to spur development that would not otherwise occur, yielding little gains in job creation or community investment. We noted that the area would benefit more from a more targeted economic development plan.

Tax Breaks for Affordable Housing: DCFPI testified that the District offers property tax breaks for affordable housing in a piecemeal, first-come, first-serve approach, and there is little analysis of whether the size of the tax break is related to the level of affordable housing in the project. It would be far better for the city to create a pool of funds for affordable housing tax abatements and then award them competitively, which is similar to a suggestion made by the Coalition for Non-Profit Housing and Economic Development (CNHED). The program could be run by the city’s Department of Housing and Community Development, which is best equipped to evaluate affordable housing projects ensure that the abatements are used most appropriately.

Check out the new incentive review process adopted by the City of Austin last year. I served on the working group that developed it. The policy requires a cost-benefit analysis and a qualitative review. While there are many cost-benefit tools out there, we focused on WebLOCI developed by Georgia Tech because of its transparency and affordable price. The Federal Reserve Board also published a free Excel based option called the Fiscal Impact Tool a few years ago. Finding affordable tools helped us overcome objections to cost-benefit analysis due to budget constraints.